What Do Whaling, The SAFE Act And Dodd-Frank Have In Common?
When the catch is sighted, it must be reached with utmost speed. An experienced harpooner masterfully pulls alongside and plunges a harpoon into its back. After retreat, descent and, finally, exhaustion, the catch is plied with lances, which are thrust into its body, tearing at its vitals. Soon a discharge of blood, air and mucus spew from its blowhole, and finally jets of blood alone. After much pain and suffering, it mercifully dies.
Brought alongside, the corpse is secured and the nasty task of cutting-in begins, by which the catch is peeled, boiled and rendered. Any remains of the carcass are beheaded and set adrift for the sharks. Everyone and everything is dyed with blood.
And no, you are not reading a description of 19th century whaling methods.
This is the gruesome process by which the Bureau of Consumer Financial Protection wrestled control from HUD and other regulatory agencies through the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. And you wonder why the Republicans took over the House last month!?
If you read my prior posts on the SAFE Act, you would know by now that:
- The Federal SAFE Act and its companion regulations are generally silent as to when a seller will be deemed a Mortgage Loan Originator and, therefore, sellers are not exempt from the law at this time;
- Congress gave States authority to pass their own State SAFE Acts which, in many cases, more specifically regulate seller-financing;
- Under the Federal SAFE Act, there may be an exemption for sellers if they are not engaging in financing for "compensation or gain," although nobody has yet to figure out exactly what that means. After all, isn’t selling a house for profit "compensation or gain?"
- Other Federal laws such as TILA are relevant to seller-financing
And so we come to Dodd-Frank. I doubt you want to read all 848 pages of the law, so let me give you the short version.
The intended purpose of Dodd-Frank is to protect consumers in a myriad of consumer-type transactions – from banking, to credit, to mortgages – through legal reform and the creation of a federal watchdog agency, The Bureau of Consumer Financial Protection. Dodd-Frank is very broad and its powers very sweeping. It will supersede or amend many federal laws already on the books including the SAFE Act, RESPA (Real Estate Settlement and Procedures Act), and TILA (Truth-in-Lending Act), all of which affect real estate transactions and mortgage financing. Put another way, it will harpoon, kill and/or strip many laws aimed at regulating financial transactions both on Wall Street and Main Street.
The SAFE Act has its own definition of mortgage origination, but Dodd-Frank will alter that. Under Dodd-Frank, a Mortgage Originator is:
(2) MORTGAGE ORIGINATOR.—The term ‘mortgage originator’—
(A) means any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain—
(i) takes a residential mortgage loan application;
(ii) assists a consumer in obtaining or applying to obtain a residential mortgage loan; or
(iii) offers or negotiates terms of a residential mortgage loan;
(B) includes any person who represents to the public, through advertising or other means of communicating or providing information (including the use of business cards, stationery, brochures, signs, rate lists, or other promotional items), that such person can or will provide any of the services or perform any of the activities described in subparagraph (A);
(C) and (D) omitted as irrelevant;
(E) does not include, with respect to a residential mortgage loan, a person, estate, or trust that provides mortgage financing for the sale of 3 properties in any12-month period to purchasers of such properties, each of which is owned by such person, estate, or trust and serves as security for the loan, provided that such loan—
(i) is not made by a person, estate, or trust that has constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of such person, estate, or trust;
(ii) is fully amortizing;
(iii) is with respect to a sale for which the seller determines in good faith and documents that the buyer has a reasonable ability to repay the loan;
(iv) has a fixed rate or an adjustable rate that is adjustable after 5 or more years, subject to reasonable annual and lifetime limitations on interest rate increases; and
(v) meets any other criteria the Board may prescribe;
Unlike the SAFE Act, Dodd-Frank specifically addresses seller-financing, so we can assume several things:
* The Dodd-Frank language will likely set the baseline minimum restrictions for seller-financing. In other words, States will now have to alter their SAFE Acts and/or pass laws that comply with these minimum restrictions, unless Congress allows otherwise;
* Investor seller-financing is going to be extremely difficult. How many investors are going to give a buyer a fully amortizing loan? How is the average investor going to determine if the buyer has a "reasonable ability to repay the loan?" That’s a lawsuit just waiting to happen;
* Even if you comply with the restrictions, what the hell does (E)(i) mean? Does it mean if you’re a professional rehabber you will NOT be exempt? Or does it mean as long as you’re not the "contractor" you ARE exempt? What will the definition of "constructed" or "contractor" be? I can’t even venture a guess at this point.
It is important to note that although Dodd-Frank reform is certain, because all the relevant regulations interpreting the law have not yet been written, it is not yet "law" despite its passage in Congress. Full implementation of Dodd-Frank could still be several years away.
Until final regulations are written for Dodd-Frank, the Federal SAFE Act and your particular State SAFE Act is the law of the land, along with TILA and State laws that regulate seller-financing and which haven’t yet been reformed by Dodd-Frank.
What does all this boil down to? It appears no white knight is coming to save investors looking to seller-finance. No matter which federal or state law ultimately controls, seller-financing is going to be regulated. Investor-sellers will likely not be exempted under either these new State or Federal laws, so they will have to comply with the restrictions imposed by them. This could include mortgage originator licensing as well as restrictions on the types of financing that can be offered to buyers.
Anyone trying to decipher all of this must be very frustrated. I, myself, have difficulty putting all the pieces together. Successful seller-financing strategies will come only over time – once there is more certainty as to which law is controlling, and what the language of each law means. Stay tuned.
In my last post related to the SAFE Act and seller-financing, I will discuss some seller-financing strategies that we may be able to use during this time of uncertainty.